London's Independent newspaper reported this week that Gulf Arab states, working with China, Japan, France and Russia, have held a series of secret meetings in which they agreed to scrap the dollar as the currency of payment on world oil markets. Quickly denied, the article was also written by a journalist known to like an entertaining story.

But whether or not the tale was true in this case, sooner or later, it will be. Traders know that. They promptly drove the price of gold up to a new record, well above $1,000 an ounce.

They are crowding into gold and commodities as a result of a long-standing, and well-grounded, anxiety. The US has been running up its debts for years. Households and businesses have been living beyond their means. The government has been borrowing heavily. And all this has been made possible by foreign governments, who have been willing to lend to America as if there is no tomorrow.

Accumulating reserves

They do it by accumulating reserves. When the US buys goods and services from foreign countries, it effectively places an IOU in these government's US bank accounts. Governments can cash in the IOU, or they can let it sit in America. In recent years, satisfied with the creditworthiness of the US, many countries have sat put, and used the money to invest in US assets.

This has resulted, what pop psychology calls a co-dependent relationship. Alchemists spent centuries in the elusive hunt to create gold; modern-day America has done them one better. In effect, it concocts money from thin air. For as long as no one calls in the IOUs, it can print yet more money to support its lifestyle.

Ongoing relationship

As annoying as this may seem to those of us forced to live within our means - the International Monetary Fund (IMF) won't be calling in on the US president any time soon - it is an arrangement which has worked for some of America's major trading partners. Top of the list is China. By subsidising American consumption, China has maintained the demand for its exports, thereby driving its own economic surge. It has had no interest in terminating the relationship.

But that may now be changing. America may not have to turn to the IMF. But while it, unlike just about any other country, can pay its bills by printing money, this arrangement can only work for as long as its partners are willing to accept that money. And there is a rising fear that the US is trying to avoid its bitter medicine. Rather than postpone a painful economic adjustment, it seems to be trying to just borrow its way out of difficulties.

For instance, many analysts believe the US has avoided restructuring its banking system. Instead, the government has thrown wads of cash at the banks to keep them afloat. For now, this has worked. But the resulting surge in the US's debt has led many to fear the US may debase its currency. Instead of tightening its belt, Washington government could monetise its debt, printing yet more money to cover its bills.

Short-term plan

This would drive up inflation. The Federal Reserve Board actually wants to do this over the short term to prevent the US tipping into a depression: in theory, if Americans (and others) believe their dollars will decline in value, they will rush out to spend them.

Or they may not. They may just send them out of the country, and into other assets. Quietly, the Chinese are already doing this. They are buying more gold and fewer dollars.

If at any point the search for the exit becomes a stampede, hold on to your hats.

John Rapley is president of the Caribbean Policy Research Institute (CaPRI), an independent research think tank affiliated with the University of the West Indies, Mona. Feedback may be sent to columns@gleanerjm.com.